Question : In the foreign exchange market, what does the term "spread" refer to?
Option 1: The difference between the bid and ask prices
Option 2: The difference between the spot and forward rates
Option 3: The difference between the current and historical exchange rates
Option 4: The difference between the domestic and foreign interest rates
Correct Answer:
The difference between the bid and ask prices
Solution : The correct answer is (a) The difference between the bid and ask prices.
In the foreign exchange market, the term "spread" refers to the difference between the bid price and the ask price of a currency pair. The bid price represents the price at which market participants are willing to buy the currency, while the ask price represents the price at which they are willing to sell the currency.
The spread is the cost or the commission that market participants, such as brokers or financial institutions, charge for executing currency transactions. It is typically measured in pips, which are the smallest unit of measurement for currency movements.
The spread reflects the liquidity and transaction costs associated with trading currencies. Larger spreads indicate lower liquidity or higher transaction costs, while smaller spreads indicate higher liquidity or lower transaction costs.
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